Roth IRA Conversion

by Ryan Guina

A Roth IRA conversion is when you convert money from a Traditional IRA into a Roth IRA. Why would you want to convert to a Roth IRA? Because depending on your financial and tax situation, Roth IRAs have advantages over Traditional IRAs due to how and when the funds are taxed.

When you complete a Roth IRA conversion and rollover funds from a Traditional IRA into a Roth IRA, the amount of money rolled over is added to your taxable income for the year. Essentially, you’re paying taxes now on the current value of the funds so that your future distributions will be nontaxable.

Who Should Consider a Roth IRA Conversion

Should you do a Roth IRA conversion?

Should you convert your Traditional IRA to a Roth?

A Roth IRA conversion makes sense for investors who are in a lower tax bracket than they expect to be when they retire. On the other hand, if you are already in a higher tax bracket and expect to remain in that tax bracket or perhaps even be in a lower tax bracket by the time you retire – then a Roth IRA conversion may not be a good financial decision for you.

A good time to convert to a Roth IRA is when your Traditional IRA has less value – like during troubled economic times – because you will make your current taxable amount smaller.

How to Set Up a Roth IRA Conversion

You will need to open a Roth IRA before you make the conversion (you may be able to do both at the same time, depending on where you open your Roth IRA). There are two options for executing a Roth IRA conversion; rollover or transfer.

  • Rollover – if you choose the rollover option, you can choose to take a distribution of funds from your Traditional IRA and “roll it over” into a Roth IRA within 60 days.
  • Transfer – if you choose the transfer option, you can simply tell the broker or bank that holds the Traditional IRA to transfer the money directly to your Roth IRA (several Trade King reviews show them having a $150 transfer reimbursement).

Regardless of the option you use to convert to a Roth IRA, you must move the entire amount of money you get from the Traditional IRA into your Roth IRA. Do not keep the cash or do anything else with any of the money or you will be penalized with an early withdrawal penalty and income tax penalties.

Roth IRA Conversion Eligibility

There are a few eligibility requirements you must meet to convert a Traditional IRA to a Roth IRA, including:

  • If you are over the age of 70 and a half years and receiving minimum distributions from the Traditional IRA, you are not allowed to roll over those distributions into the Roth IRA.
  • Your income tax filing status cannot be “married filing separately” unless you didn’t live with your spouse for an entire year, then you may still be eligible if you meet the other requirements.
  • If you inherited an IRA from someone other than a spouse, it cannot be converted from a Traditional IRA to a Roth IRA.

Should you do a Roth IRA Conversion?

There are many factors that can complicate Roth IRA conversions, so it is a good idea to look at the total situation including your current financial position, current tax rates, potential future tax rates, and other issues. You may also find it a good idea to consider hiring a financial advisor or hiring an accountant for assistance with decisions regarding your Roth IRA and making sure you fully understand the ins and out of the Roth IRA contribution limits and rules you need to follow to maximize your benefits.

Photo credit: Colin_K


Published or updated September 14, 2016.
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{ 10 comments… read them below or add one }

1 myfinancialobjectives

hmm, makes me think I should convert! I hope to be in a higher tax bracket by the time I retire, but there’s the thing, you can never be sure!

I guess considering I JUST started my IRA, I could easily convert to a Roth IRA, I may mention this to my broker. I read about this a few months back, they seemed attractive then, and even more now considering I actually have an IRA now…


2 Doug Warshauer

@myfinancialobjectives and Ryan,

While you hope to be in a higher tax bracket by the time you retire, AFTER you retire won’t you drop down to a lower tax bracket?

After you retire your only income would be your annual distribution from your IRA, plus your Social Security benefits and taxes on any investment income in taxable accounts. Seems like this would probably be less taxable income than you have while you’re working.

Does this line of thinking make sense, or am I missing something?


3 Ryan

It depends, Doug. Many people also have 401k plans, Traditional IRAs, or similar retirement plans that are taxed upon withdrawal (403b, 457b, Thrift Savings Plan, and a host of self-employed retirement plans).

I also know retirees who continue earning money after they “retire,” from things such as real estate rental, dividends, consulting, freelance work, etc.

This is a situation where it is probably a good idea to sit down with a financial planner and/or tax professional to look at your total financial picture, and what you think it may be in the future – knowing full well the future is unpredictable!


4 basicmoneytips

If at all possible, you should probably go for a ROTH IRA conversion. As expected, with all the spending the government is doing and the debt the government is running up, there is no way taxes are going down – its just not possible. What is happening in Europe is a foreshadowing of what is going to happen here. To put your money in a tax free account is a smart move in my opinion.


5 Ryan

Absolutely! I have no idea where are taxes will be in 5 years, let alone the 30 before I will be eligible to withdraw my my IRAs!


6 dima

It is a good point, however, the problem is that there is no guarantee that the tax laws won’t be rewritten to go ahead and tax Roth IRA distributions at some point in the future (yet another way to make up for government spending), just look at the changes to HSAs that are being forced on everyone starting next year. Will it happen? Nobody knows, but you might get double taxed at some point, so it still might be vise to have both, the Roth and Traditional IRA/401ks…


7 Ryan

Dima, you’re right. No one knows what will happen in the future in regard to taxes. I would hate to be the Congressman/woman who recommends changing the taxability or Roth IRA distributions though – they are almost seen as sacred!

Many financial planners recommend have tax diversification in your investment portfolio, which for many people would mean using Roth IRAs and a traditional 401k, but there are many other ways to go about getting a tax diversified retirement portfolio.


8 Douglas Wilson

There is nothing to consider before converting to a Roth IRA. I thought there were certain things to assess before converting just like everyone else; but after I read The Gospel of Roth by John Bledsoe, it was clear that I should convert. The book completely contradicts what I had been reading off every news site and explains how converting as soon as you can is the best option. Because you don’t have to decide whether you want to keep it as a Roth IRA or convert it back to a regular IRA until October 17th, 2011, converting now is like having a free look at the future. If it proves better to convert, then you already converted. If you should have left it as an IRA to save taxes, then convert it back free of penalty. The Gospel of Roth is easy to read and straight forward, and practically made my decision for me.


9 vgpajj

Hello Ryan,

I have IRA account with Fidelity. Some reason, Fidelity is not letting me buy puts to protect my investment. They are only allowing me to sell calls against the equity investments. I want to move my money to other brokerage companys who would let me trade options to protect my investment. I would appreciate if you can recommend a good brokerage.




10 Ryan Guina

vgpajj, Here is out list of favorite online brokers. There are several great options to choose from which would meet your needs. TradeKing is one that I personally use.


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